IoT Hardware Is Global and Software and Services Are Local—How Trump’s Tariffs Impact the IoT Market and How It Can Respond

In the Internet of Things (IoT) world, it is fair to say that IoT hardware is global, and software and services are local. Devices and connectivity are built from components all over the world. Once a product is connected, connectivity services are typically delivered locally via local networks or cellular networks. The services to build the applications, analyze and store data, and support IoT solutions are also typically available in the country they are connected within.

Trump’s tariffs apply to goods, not services. This is not a hard and fast rule in the Trump tariff fine print, but there are practicalities that drive the focus of tariffs on goods. First, custom enforcement agencies are not equipped to tax services. Second, U.S. and international communities have agreed through the World Trade Organization (WTO) and the United States-Mexico-Canada Agreement (USMCA) that software and services are exempt from tariffs. Effectively, services and subscription-based software have less chance of being taxed using tariffs—at least for now.

The ramifications for devices and communication components are that they will become more expensive for the U.S. market. This applies to both standalone IoT devices and machines with built-in sensorization and connectivity.

Looking at this on a deeper level, IoT systems using high-turnover standalone devices will be harder hit by tariffs. An example is an asset tracking solution. If the device is replaced every 2 years, and the device comes from China, your device costs will more than double (assuming the 145% tariff rate). Devices that experience higher turnover in the IoT domain are in categories covering people/pet tracking, wellbeing wearables, home monitoring and patient monitoring segments, and the broad enterprise asset tracking segment that covers pallets, smart labels, etc. It can also affect condition-based monitoring categories such as tank monitoring. These categories represent 22% of the U.S. installed base today and will grow to 28% by 2030.

IoT solutions for devices and machines with embedded sensorization and connectivity will be far less affected by tariffs on these components because the sensor and connectivity components will be a smaller share of the total machine cost. It is more likely that IoT solution demand will decrease because tariffs will increase the price of these new digitized machines and, thus, lower overall demand for the machine itself. For instance, tariffs that decrease demand for cars are far more likely to decrease demand for IoT services than will be the added costs of IoT components in the car. Already, Telemetry, a Detroit-based automotive advisory firm, is projecting that auto sales across the United States and Canada will decline in 2025 by 1.8 million units if the current tariff environment remains in place.

The challenge with projecting the ramifications of tariffs on the IoT market is that ecosystem choices are highly dependent on the magnitude of the tariffs—how much additional cost will tariffs add to my product? If the tariffs were to stay in the 10% range, suppliers could react more slowly and possibly just wait them out, hoping that Trump will give up on his tariff strategy, or wait until Trump is out of office altogether. Regardless, as long as Trump is the president, IoT suppliers need to understand the possible tariff implications on their IoT business, and the choices they can make to limit the tariff impact.

• China May Be Least Affected: The trade war will have less impact on the Chinese IoT market. There are a lot of “it depends” in this assertion, depending on the connectivity technology because Qualcomm owns such a large share of the cellular chip market. However Microcontrollers Units (MCUs) are not exclusively U.S. products—many Western European companies offer processors. The rest of the IoT value chain can be served by Chinese firms such as Huawei and ZTE for device-to-cloud services, and Alibaba for hyperscaler services. Even the hardware in data centers that support applications and data storage are increasingly using Chinese and Asia-Pacific suppliers. However, the issue for China with the tariffs is that IoT hardware vendors want and sometimes need to expand outside of China to drive profitability. In China, device and component competition is stiff, driving down profitability. Yes, Chinese firms can sell into Western Europe, Japan, South Korea, and a few others, but the U.S. market is a tough one to give up. As an example, one major cellular module vendor had 54% of its sales in 2022 and 2023 outside of China. Its average profit margin was 2.5%!
• Subscription Fees: Back in the United States, tariffs may cause IoT solution providers to reassess their business models. For instance, vendors that offer a disposable device model may want to switch to a reusable device model. Disposable device models have advocates for improved sustainability, but tariffs make sustainability more expensive. Already, suppliers like Tive and Controlant are measuring themselves on their “reused device” percentage. Other models may also include more devices bundled into the solution with longer service contracts. Hiding the higher device cost is easier by spreading the higher device fees across monthly subscription fees paid over a longer contract period.
• Supply Chains: As the components in IoT devices and gateways are many, the only reason for the component Original Equipment Manufacturers (OEMs) to move manufacturing to the United States is if they have many or their largest device OEM customers in the United States. The biggest IoT markets that could see this change are the automotive and smart home segments. These two segments constitute about 40% of the U.S. IoT market measured by installed base. Another possible change to supply chains could be that electronic component, with distributors stepping in to help soften the cost impact and taking on the brunt of supply chain realignment for U.S. device OEMs. This group is used extensively by the IoT device community, particularly smaller OEMs that are not buying directly from component suppliers. They would be better equipped to more cost-effectively resource products and even support supply chain realignment to lower tariff countries—or to support more onshore U.S. production.
• Transfer Pricing Schemes: One way that device OEMs are looking at lowering the costs of tariffs is by separating the software from the hardware. Many IoT device OEMs bundle the firmware/software on the device and ship to the United States. If they can disentangle the device software from the hardware, tariffs would apply to a less expensive device. But how this is done can be a challenge. One option is to show that the software comes from the United States, so the tariffs would only apply to the hardware. But this may not be legal per Internal Revenue Service (IRS) guidelines. The second option is shipping the “dumb” device to the United States and flashing software onto the hardware when in the United States.
• Chinese Supplier U.S. Reshoring: There are Chinese IoT suppliers actively building businesses in the United States to allow selling their products under the label of “Made in the United States.” So far, there has been no backlash to this activity. Could this mean more Chinese IoT device and component OEMs building manufacturing facilities in the United States? The answer is maybe. First, the political environment in both the United States and China would need to allow it. Second, would the sales in the United States for Chinese OEMs be large enough to support the move, knowing that wages in the United States would be higher than in Asia-Pacific? Robotics could alleviate higher human labor costs. However, building a new factory or retrofitting an existing building in the United States would be costly compared to the costs in China that are low to non-existent for Chinese manufacturers. The Chinese government often pays for all or part of new factory construction in China. Third, components sourced outside the United States will still see tariffs, but would there be U.S. exemptions if a product is assembled in the United States?
• IoT Software and Services Impact: It is unlikely that tariffs will apply to overseas software and services consumed in the United States. As a result, tariffs will have much less impact on IoT value chain software and service costs, including application development, device-to-cloud services, data storage, etc. However, tariffs could affect IoT software and services in two ways. First, if fewer devices are deployed, there will simply be less need for software and services. However, tariffs could also accelerate the use of software in certain business processes. An example is in supply chain logistics. Many companies have used data from Enterprise Resource Planning (ERP), warehousing, and transportation software systems to enable greater visibility in the movement of goods across the supply chain. And now asset visibility suppliers are augmenting their software-only approach with IoT devices for not only the location and condition detail, but also for real-time alerts, enabling better control over cargo in transit. However, the Return on Investment (ROI) of visibility solutions that use IoT devices are very sensitive to device costs. The result is that the added costs of tariffs will likely slow down greater use of IoT devices for supply chain visibility, either delaying device investment or driving customers to invest more in software-based solutions.
• 5G Acceleration—or Deceleration: Many in the device and Mobile Network Operator (MNO) community are seeking growth in 5G, both for its revenue from replacing 4G devices, but also for monetizing 5G network investments. The challenge right now is that 5G devices are more expensive than 4G devices. One tariff scenario an acceleration of 5G device deployments in the U.S. market because higher volumes will bring down device costs, and operators want to start monetizing their 5G networks. The problem with this hypothesis is that U.S. operators are still upgrading their 5G networks to Standalone (SA) and 5G network equipment for U.S. operations is primarily coming from Ericsson and Nokia, companies that mostly manufacture their 5G products in the tariffed regions of Europe and Asia-Pacific. The second is that the United States is still 5 years away from starting the 4G network shutdown, so there is no need to take on the extra costs to accelerate 5G device uptake. The more likely scenario in the U.S. market is that 5G adoption in the IoT market will be delayed slightly or see more hockey stick growth late in the decade.

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